Koninklijke Philips NV (PHG) 2007 Q1 法說會逐字稿

Good day and welcome to the Genlyte Group first quarter 2007 earnings conference call. Also welcome those who are listening on our webcast. [OPERATOR INSTRUCTIONS] As a reminder this conference is being recorded with an audio archive copy becoming available approximately three hours after the conference of Genlyte Group's website at www.genlyte.com. Again, that's www.genlyte.com. This conference will begin with an overview of 2007s first quarter results by Mr. Larry Powers, Chairman, President, and CEO of Genlyte; and Mr. Bill Ferko, Vice President and CFO of Genlyte followed by a question and answer session. [OPERATOR INSTRUCTIONS] Before we begin let me remind you that today's discussion may include forward-looking statements. These statements are based on our view of the world today, and therefore are subject to risk and uncertainty which are discussed in more detail on the Company's most recent form 10-Q. Obviously actual future results may vary.

We will shortly hand you over to Mr. Powers.

Good morning everyone. Welcome to Genlyte's first quarter earnings release. As we stated in the release that we put out this morning we're very pleased with the sales predictably in the first quarter. Even though our residential business was very soft and continues to really get softer each month we were able to offset that with some very strong commercial sales, and also, as you see in the numbers we're able to gain a lot of benefit from our recent acquisitions. I think if you look at the near future and ask what we think about the market or what's going on I don't think we foresee much change from what's taking place right now.

The residential market we're not sure whether it has bottomed out or not. January was weaker than December and February was weaker than January and March was weaker than February and our April so far is continuing on that same path and it continues to erode. So the overall residential market is continuing to perform at a very low level, and where that bottoms out at we're not sure. It's kind of our guess sometime maybe mid-summer that we will see residential start to bottom out. Hopefully by the fall we might start seeing a slight improvement. I think it's going to be some time before we see any significant improvement in the residential market.

Assuming that the commercial market stays at its current level, at or near its current level I think we will continue to perform at about the same level as we have in the first quarter, recognizing that some of the acquisitions will fall off. Obviously we acquired JJI, which was a significant acquisition for us in May of last year. So after May, those numbers won't look quite as strong as they do now because the year over year. We get the year over year comparison now and the benefits of the acquisitions. When we look at the acquisitions, we have still a lot of work to do to get the companies that we've acquired in this past year up at Genlyte's average return. And that's always our objective is to when we acquire companies and then, obviously, some of them we'd like to have even better than our average return.

At the present time, the last three acquisitions that we made, being Strand, JJI, and then Hanover Lantern are all performing at a level well below Genlyte's average return. But we do have programs and things in place that over time we will be able to significantly improve those. In fact we have some significant costs that was pointed out in the first quarter related to JJI in closing down their corporate headquarters in Connecticut. And those headquarters are now located in Chicago where Jim Hayworth was already residing. At another facility, we're not opening up a new facility or anything in Chicago. It's a part of Alkco, one of their divisions was there. The corporate headquarters will now operate out of the Alkco facility in Franklin Park, Illinois which is very close to the Chicago airport.

Hanover Lantern, one of our recent acquisitions is I think is going to be a very good acquisition. They're a company that has a significant amount of their business. Probably be, I don't know the exact percentages but probably 25 to 30% of their business is residentially related and they've seen a little softness in their business so far this first quarter. But their growth and the strength of the Company is on the commercial side of their business, which they'll be introducing many new products and they've already taken some action to reduce some of their costs and that company will continue to improve.

Strand also has significant opportunities over the next several months. We're in the process, in fact, I'm going to England the first week in June to kind of reopen our operations over there. We've now started hiring people. We're going to take Strand back into Europe in a big way. After the bankruptcy and that, we were limited from selling into Europe or actually establishing the business there. We actually sold some products into there that were produced in the United States. But we're going to reestablish Strand back into Europe and we think that provides some real upside opportunities. Also we have a long ways to go to improve the profitability for Strand's business. They're still struggling. In fact they actually lost a little bit of money in the first quarter. But that will be the last quarter that they will lose money. They will progressively get stronger over time.

Next month in New York for those of you who would like to really see, those of you who haven't seen our products. And actually what we do, you can visit us at Light Fair which will be held at the Javits Center in New York City. It's our large lighting fair that's held every year. They alternate between New York and Las Vegas. Last year we participated on a very small basis in Las Vegas. But we'll be there in full force this year with most all of our companies that have exciting new products. We have a lot of introduction of some new LED products that you'll see. We do believe that LED is going to be a real factor in the lighting market in the future. And you will see for those of you who come and that will see the introduction of some exciting new products.

In addition to the new products that we'll be introducing at Light Fair, Lightolier just had a major new introduction into the PL down lighting business where they have developed, patented a lot of the features and benefits of an exciting new product that's geared specifically for PL down lights for the commercial market. Extremely easy to install, very energy efficient. They just released these products last week. They had a series of meetings where they invited in a large number of distributors and contractors from across the country in two different sessions presented them this new product. And they got just raves about this new product, the ease of installation and the opportunities for this new product.

So we think that very timely, they'll also be following that introduction up with some additional products to take that even into the residential market down the road. Because I really do believe that the time has come for down lighting to really become or PL down lighting and specifically to become a real factor in the residential market going forward. Right now, if you look around, it's still pretty much a incandescent market. Some of you may have heard that the states of California and Connecticut have now -- they're trying to push through legislation to abandon the incandescent lightbulb, which I personally think is ridiculous. It's like if we want to get serious about energy why don't we abandon the automobile and go back to riding horses and bicycles? That makes about as much sense to me as abandoning the incandescent lightbulb. But you never know what will happen.

We're all in favor of producing and promoting and that energy-efficient products and all that, but we think it needs to be done in an orderly organized fashion. Not just go out and abandon certain products. I think we will continue, again for the foreseeable future at about the rate we've that been performing at, unless we see a significant change in the market. There's a little softness in certain market segments. It's somewhat geographic, also we see areas of the country that aren't quite as strong as other areas, but all in all, particularly the major commercial market appears to be very strong. It seems to us that some of the what we call flow goods, the day in day out, that a contractor walks into distributor and buys a few lighting fixtures for a few little jobs, it seems that business may have slowed somewhat. We're not sure if that's because its tied a little more closely to the residential market. But all in all, the commercial market is still relatively strong.

So I think with that, I will turn the time over to Bill and let him talk to you specifically about some of the financials. And then we can be happy to answer any questions that you might have.

Okay. Thank you, Larry, and good afternoon to those of you on the East Coast and good morning to those of you on the West Coast. As you saw in our press release, the first quarter sales were $394.4 million or $65.2 million or 19.8% higher than the same quarter in 2006. I know a lot of you are interested in our segment information, so I'll give you some of that. Although we're still working on fine tuning some of these numbers and that's why we didn't publish all of this.

At this point, it looks like -- now this includes acquisitions, residential in total was down 2.7%, commercial up 22.1%, and industrial up 30.9%. Some of the more recent acquisitions had a fairly significant impact in this -- it's industrial and other, which includes utility business, as well. One of the factors affecting first quarter sales was the converting of our first quarter Canadian sales at a slightly average weaker Canadian dollar, which actually had a degradation of sales of about $775,000.

Orders during the first quarter were 16.8% higher. And backlog going into the second quarter is 27.7% higher than in 2006. We're very pleased with our gross margin from the first quarter. Again, I think the benefits of or the effort of our new product development and being able to convince customers of the benefits of higher value-added products has enabled us to improve margins and our price increases have helped along the way, as well. So our gross margin for the first quarter came in at 39.9% compared to 38.3% in 2006, which was a fairly significant and 2006 was over the year before. So we've had some pretty nice improvement in gross margins during the last couple of years.

In the operating profit area first quarter operating profit was $58.1 million, 33.4% higher than first quarter of 2006. And our operating profit margin improved to 14.7% of sales compared to 13.2% in the first quarter of 2006. Excluding acquisitions, operating profit margin would have been even higher at 15.9%. Cost increases continue to be a factor, however. And we're continuing to work diligently to offset a lot of these costs that are head winds that we're facing. This morning, we just had a meeting where we discussed increases that we're facing in the aluminum, which is important for our outdoor business, as well as reflectors that are used in our indoor business, and then copper prices, which are used in magnetic ballast and zinc coatings which are used in certain types of metals that we use. In addition, energy costs, as you can imagine, impact transportation as well as cost for painting systems and our employee benefits continue to increase just as they do everywhere for all employers.

During the first quarter, we did have other currency issues. We had a currency loss attributed to translating Canadian working capital. That was $324,000 versus a gain last year of $135,000. And in addition, the conversion of the Canadian divisions operating profit had a lower exchange rate resulted in a decrease of the earnings translation of $124,000.

In the area of net income, it was for the first quarter we were at $35 million compared to $48.6 million in the first quarter of 2006. And I believe most of the analysts and investors who understand our business understood that during the first quarter of 2006, we had a one-time tax benefit of $24.7 million due to a tax or corporate restructuring related to the Genlyte Thomas Limited Liability Corporation being recharacterized from an LLC to a C Corporation. Excluding this tax benefit, this 2006 tax benefit, net income improved 46.2%.

Earnings per share for the first quarter then came in at $1.20 compared to the $1.70 last year. First quarter 2006 net income, again included the $24.7 million, which equates to $0.86 per share related to the tax restructuring. And excluding this tax benefit, earnings per share improved 42.9%. In the area of cash generation, our first quarter cash flow from operations net of capital expenditures is $15.8 million. Use of cash compared to a $20.5 million use of cash in 2006. Our first quarter is typically a heavy cash use quarter. It's a quarter when we -- we fund inventory investments for the seasonal growth of sales during the second quarter. We fund certain rebates and bonuses and that type of thing. So it's -- historically and typically a cash use quarter. So we're fairly pleased that this year the use was less than it was the year before. Nevertheless, first quarter working capital less cash, cash equivalence, short-term investments, and debt increased $35.9 million to $233.2 million versus $197.3 million.

These again are preliminary numbers, we're continuing to work on the balance sheet. We wanted to get our earnings out, preliminary results on the balance sheet as fast as possible. Because our shareholders meeting is tomorrow and we wanted to have the information publicly available. So we're still working on some of the -- and that's why we did not publish the balance sheet. Some of the line items within our balance sheet are potentially shifting around. We think it's pretty final. But some of these working capital numbers might move a little bit, particularly the nonreceivables inventory and accounts payable type of numbers. So working capital as a percentage of analyzed sales has decreased from 15% of sales to 14.8% of sales.

Inventory increased then during the quarter by 46.4 million to 199.7 million versus 153 million in the first quarter of 2006. Some of these increases in working capital are attributed to the four acquisitions that we've had during the past 12 months. As a percentage of sales, annualized sales, inventory has although increased to 12.7% of sales from 11.6% of sales in 2006. It's a metric that we're carefully watching and hopefully we'll continue to bring it back down to results that we've achieved in the past.

In the area of capital expenditures, we came in at $9.3 million, which is $4.3 million higher than the first quarter of 2006. There's some new machinery and equipment that's going in in a couple of our factories. In addition, some of the restructuring, putting equipment into these factories related to the JJI moves are being capitalized, as well. Debt this quarter, our net debt less cash and short-term investments position was $110.5 million, increasing from the $83.8 million for the first quarter of 2006 and $71.2 million at the end of 2006. It should be noted that during the past 12 months, we've invested or funded approximately $160 million for the acquisitions that have taken place. And with that total debt has increased $12.5 million to $158.8 million from $146.3 million from the first quarter of 2006. That's the end of my formally prepared comments. And with that, I will turn the line over to questions.

Thank you, Mr. Ferko. [OPERATOR INSTRUCTIONS] And we'll take our first question from Matt McCall from BB&T Capital Markets. Please go ahead.

Thanks, good afternoon.

Hello, Matt.

Bill, you gave us some of the total growth numbers. Can you remind us again how much -- how much acquisition revenue was in each one of the segments?

Yes. Not quite sure what the best way is to do this. I can give you in each of the segments. Let me give you a breakout of each of the three segments.

Okay.

In the commercial segment as I indicated before, total growth was 22.1%, okay? We have 13.1% of that categorized as acquisition growth, 3.8% of it categorized as price, and 5.1% categorized as volume.

Okay. Okay.

Within the residential segment, total growth was a negative 2.7%. We got acquisitions added 9.4%, volume was a negative 13.6%, and price added 1.4%. In the industrial and other sector and let me remind you other includes utility type business, specifically Carsonite, which is more of a roadway/utility type business. In that segment, total growth was 30.8%, acquisitions added 27.5%, price was 5.1%, and volume was a negative 1.8%. So again, price and volume relate to comparable operations.

Okay. And just to be clear, Larry, on one of your comments. I'll say a couple times you said we should continue at the rate we've been -- or we reported this quarter. Specifically, what rate were you referencing there?

Well, the rate of which we've had our standard growth. Yes, comparable operations, and then as I said, some of the acquisitions will fall off. JJI will fall off in May because we acquired them last year in May. I look at the commercial business to stay about the way it is. And we hope the residential doesn't get any worse than it has been. I think the industrial market for us, which is rather small will stay about -- about the way we've seen it this first quarter.

And you're saying the growth rate will stay about that rate? Or the total -- total top line will stay about that rate? That's what I'm not clear on.

The growth rate will stay at that.

That clears it up. And Bill, can you also give us any kind of profitability metrics for the three segments?

I don't have that available yet. We're still fine tuning that stuff. I hesitate to even give you that right now, Matt.

We have to do some work on it. Primarily, you're going to see the residential profitability that we've seen in the past is going to drop significantly from where it was. Because with the decline in volume, we just won't have the absorption and the profitability of our residential segment. We'll definitely be down substantially from where it was. We just haven't had time to get it all broken out and do the analysis yet.

I guess that's kind of where the question was going. Is what, I know that the highly variable cost model that you have in that residential business. And I think the Q4 margin was 15.7%. Just trying to get a handle on how much of that down 14% volume is impacting your margins. Are you saying it's down substantially from 15% or down substantially from the high teens that you reported in previous quarters?

It's going to be probably in the 15%-ish range.

Okay.

So -- it's clearly going to be below where it was. In 2006, it was unusually high and it's going to be down from those levels from fourth quarter and from first quarter 2006.

One of the good things I might point out on the residential market, particularly our largest residential division, which is our Thomas Residential Lighting, which sells chandeliers, all kinds of decorative products and that that would go into your home. The majority of that product line is produced overseas and so we -- we've -- we purchase the majority of that product line. We have one factory, really, in Tennessee that produces product for that. It's a rather small factory with not a lot of overhead. So we don't have other than just people costs and just jumble, we don't have a lot of facilities and that that are underutilized. That part of that is going to help us this time around versus several years ago when we had three or four major factories producing residential products. If this downturn had happened then, you would see a significant downturn in the profitability. But right now, you're not going to see as much downturn just simply because we just stopped acquiring products.

Right. And sounds like things are pretty bad from a volume standpoint, you're still getting 15%. Based on what you just said, is that mid teens level going to kind of be the norm as we face these tough, tough periods?

I think -- I really do think it's going to go lower. We don't know exactly where the bottom is here yet. As you'll recall. If you look back to the DODGE numbers the housing start numbers from 2006, they started going down in February. As you know in our business, our residential business was still growing up through October maybe into early November and got flat in November and started dropping off from there. We have probably a 6 to 9 month lag off of housing starts. And so there's clearly a few months here where we're going to continue to experience that negative growth that we saw in housing starts during the second half of 2006. And of course, that will probably impact margins. And hopefully, the market will stay somewhat rational. But competitors get desperate. And hopefully they don't do stupid things, but it's unpredictable. I wouldn't be surprised to see it go down. I would hope to keep it in double digits, but it will probably go down in the low double digit margins. It wouldn't surprise me at all.

Okay. And then one last one. The Strand comments -- the refocus, I guess, or the reopening of the Europe operations, can you comment on the opportunity you've got -- I don't think that was in your initial revenue that you quantified that you acquired with that business. What kind of opportunity does a Europe operation offer?

Well, I don't know if we know, exactly. But we have -- my own personal, I have a fairly high level of expectations over there. Strand has a great name in Europe, they had some real quality issues. The operations have been pretty badly damaged for many years and it's going to take us some time to repair that. But I think over the next few years, it has some significant upside potential. Veri-Lite, which is one of our other companies in similar business is doing extremely well in Europe these days. And we have some pretty high level of expectations. I'm not going to give you an exact number because that would be just picking it out of the sky. I can just say to you that I think it's a nice volume for us down the road.

Okay. Thanks. I'll jump off.

And just reinforce something, Larry said earlier, our issue, short term issue for Strand is not necessarily volume. It's getting costs aligned and getting the business turned around to be profitable. We have cultural issues in terms of making sure the quality is good before something gets shipped is something that I think we've got that under control now. And it's taken us a while to get there. But that philosophy has been very much reinforced since the Genlyte acquisition and it's starting to already show the benefits.

Okay. Okay. Thank you, guys.

And we'll take our next question from Christopher Glynn from CIBC World Markets. Please go ahead.

Hey, how you doing today?

Good, Chris.

Good. Just a little follow-up on the res margins. Talked about maybe going down from the 15% preliminary range to the low doubles. Do we have a seasonally weak quarter fading into the seasonally strong quarters. Would that low doubles more be like a next fourth quarter 1Q type scenario?

I think it's going to start happening immediately. We've already seen it happening. The margins were much stronger in January than they were in February. And March is the weakest we had. And I don't think -- we just had some forecasts or some projections today from our residential division saying that their business is pretty soft. I think those margins are going to go down immediately.

So the -- the broader trend kind of shooting passed any seasonal.

Yes. Keep in mind, last year, the second quarter was a seasonally strong quarter, as well. We're going into -- the second and third quarter in the residential markets are historically or typically seasonally strong quarters. However, the overall trend in residential is down. So -- it's the same season compared to the same season, if you would. And this year's down compared to last year being up.

I guess I was thinking of margins in terms of more strictly related to volumes even on a sequential basis.

Yes. There's not a tremendous amount of leverage in the residential area. Again, we're fairly cost conscious on the SG&A overhead in residential. And we have contract manufacturers that we use for a lot of the design work there. There's some leverage that we may be given in some down lighting areas. But I don't think we're going to see too much of a shift related to that. The bigger issue is just overall lower volume and we have a fair amount of fixed SG&A just in product development and customer services, et cetera, that you need a minimum amount of that stuff.

Okay. And on the top line outlook, articulated expectation for similar overall growth rates. But within that residential deteriorating further, do you see commercial picking back up a little bit? I guess the last couple of quarters was down from the middle of last year. Is that reaccelerating a little bit?

We've talked about that commercial -- or residential related commercial volume. Again, I like to use the suburban retail. Others talk about the light commercial. It's anything you don't use a jackup crane for that's in the suburbs of the city that's near residential. And it's the shopping malls, it's the grocery stores, the Blockbuster stores, or whatever that goes up near the suburbs that are getting built out. And that is going to be related to the residential construction and be soft, as well. So there's that softness. That's offset as you know, we look at the DODGE numbers and we look at the NIMA numbers, as well. And some of the other sectors are commercial construction are hopefully going to offset that. But not to the extent of the growth that we saw last year.

Okay. And the margins were just so dramatically better than in the fourth quarter. Just want to flush that out a little bit. Was mix that much better sequentially? Was price costs, the acquisitions actually get a little bit better sequentially? Was it the end of year accounting adjustments?

Well, a little bit of all of the above, actually. But the one thing that we have seen is that some of our lower margin, the more commodity fluorescent HID type product businesses is relatively soft right now. And our business just happens to be the business that we're getting happens to be in the product lines in our higher end down lighting, HID outdoor, and some businesses that we have very good margins happens to be kind of the sweet spot right now and we've just been very successful in growing those businesses during this challenging time. Our overall fluorescent business is at best flat and probably actually in unit volume down slightly. And so that's one of the lower margin businesses that we have. So that part of it -- part of our business has to be weak. That's the part we like to be weak.

The fluorescent down lights would be--.

No, no our fluorescent down lights -- but yes, the fluorescent trougher type is, it's the 2 by 4 trougher, that type of thing is relatively soft.

And should the recent price increases should have more of a benefit in the second quarter than the first quarter, is that right?

I don't know that they're going to have much more. The only reason I say that is because of the cost pressures that we're getting on the material side. We don't know for sure. The pricing seems to be hold reasonably well. Although there's markets where we've got some competitors, some situations where they're being very aggressive and that. But we do and are concerned about cost pressures as Bill mentioned to you. On steel, on aluminum, we're not sure where this is going to go. If everything stays the way that it is right now, then our margins are going to stay about the same. If we get more cost pressures and then we're not able to get more pricing, then obviously our margins could suffer a little. We are forecasting right now for it to stay pretty stable with where it was in the first quarter. We'll get some cost increases, but we'll also get some price benefit.

Great. Thank you very much.

And we'll take our next question from Peter Lisnic from Robert W. Baird. Please go ahead.

Good afternoon, gentlemen.

Hi, Peter.

If we could just talk about top line for a bit again. Bill, you mentioned orders were up almost 17%, I guess year on year. Can you give us the organic number?

For orders?

Yes.

I've got that here somewhere. I think it's in line with our sales growth.

Around 9%?

No.

It won't be 9% overall. It might be 9% in the commercial side.

I don't have that broken out. I'm sorry, I don't have that broken out.

Most of our companies and the backlogs are staying relatively flat. It's going to be pretty consistent again with what we've seen in the first quarter other than -- the only one that we're seeing a real deterioration as we've already discussed is in the residential market. Our companies that are primarily in the commercial market are relatively stable with -- and I think we feel they'd be about the same in the second quarter as they were in the first at this time.

Okay. All right. That makes sense. And then on the margin side, you talked about, I guess some potential pressure with increased commodity costs here in the second quarter. I'm wondering if you had any sort of, I don't know how else to phrase it, but any sort of excess margin on the first quarter as you put through some of these price increases, but then didn't see the price increase from the cost side of the equation yet.

Most of the price increase is really a result of the price increase that was effective last June, 9 or whatever, 10 months ago. And so that's the benefit that we've seen in this quarter. Most of our price increases that we announced during this quarter were effective toward the end of the quarter. And so they hopefully will be offsetting cost increases that we see coming at us during the second quarter. But again, so the -- the price increases we announced in May of 2006 effective June 2006, we started to see the benefit of those in July and August of last year.

Hopefully you're right, the price increases announced during -- effective toward the end of February or in March of this year will be a benefit, hopefully as the backlog rolls off, probably, I don't know May June, we won't get much in April. The backlog is still burning off at the old prices, if you would. There are some stock and flow items that are still coming out at the old prices. The other thing, of course, is the key to all of this is the competitive response. At this point, all four of the larger lighting companies have announced price increases and two of them were -- two of our competitors have price increases that were effective at the end of March or the beginning of April, one competitor was in the middle of February, approximately the same time as ours. So so far it's all of us, all of those competitors would still be burning off backlog at the old prices. It will be interesting to see really right now that we'll start to see if everybody is doing what they said they would do and hopefully they do. But it's still too soon to say what the competitive reaction is going to be. And we really do need it because the price increases are very real that are coming at us.

And if I just kind of look at that operating margin you put in the first quarter of 15.9 ex acquisitions. What it sounds like you're saying is that head winds are really residential and if there's any sort of inability to cover price whether that's through cheating or just increased costs in the second quarter, those are kind of your two big head winds, but outside of that your expectation is that you'll be able to maintain that margin in the second quarter and presumably further than that. And then also, I would assume that you ought to be able to generate some sort of margin improvement for the acquisitions that are in the portfolio. Am I thinking about this the right way?

They're going to take a lot longer -- your first two things, were hopefully correct. Again, depending on the mix issues and the timing of price increases relative to cost increases. And hopefully those two will offset. But the -- the issue with respect to the acquisitions, it takes a long time. For example, the Strand acquisition that we did in July of last year is still barely breaking even. A slight loss during the most recent quarter. And we've done a lot of things to that company. It takes a long time to move production around, to affect the changes that we need to make to take place.

You also have costs related to that too. We have some costs in the first quarter and we're going to have to continue to incur some costs, consolidating moving, transferring our. As an example, when we bought Hanover Lantern they have a foundry, we have another company there Hadco just a few miles away that has a foundry. Well, we want to consolidate those two foundries and that will be outstanding for us. But it's going to take time to be sure that we get all the right equipment. We've got to move the equipment, put it in place, and be sure that we can produce all the products for both companies out of one foundry. That's probably going to take us a year to 18 months to get that implemented and get that in the process. And in the meantime, we're going to incur some costs for doing that and we won't get the benefit until it's done.

Okay. But if you look at those acquisitions, it's not like we're sitting here today saying these are acquisitions that at some point will not be at corporate operating margin levels. You're still comfortable that they're good for franchises that you can get them to corporate level operating profitability that may take 12 or 18 more months, but nevertheless -- and there's going to be some spending involved, but nevertheless, you're going to get there.

The short answer is yes. But keep in mind not all of our divisions are at the Corporate operating margin level. There's some that are higher and there's some that are lower. These companies that we acquire during the past year, I think have the ability to get at or above our corporate averages, if you would.

We wouldn't have acquired them if we didn't think that. We really believe that they will be there. Again, how quickly -- particularly a company like JJI that has a lot of divisions and within JJI, they had some very profitable companies above our corporate average and they have some that are well below. It's a real mix of companies in that. But ultimately the answer is yes, we would hope to get them all. A couple of them we expect to be better than our corporate average.

That's good for me. Thank you very much.

And we'll take our next question Min Cho from Friedman Billings Ramsey. Please go ahead.

Yes, great. Thank you. Couple questions. First, Larry, on the last conference call you had mentioned that you were potentially looking at starting up a manufacturing plant in China. I was wondering if you're any closer to making a decision on that?

Well, we really aren't much closer. We're doing a lot of investigating and in contact with a lot of people. Our operations manager, I just talked with him past week. We spent a fair amount of time looking about some of the alternatives. We still haven't found what I think is the perfect solution. We got people who would like to enter into a joint venture with us. I don't believe the type of business we need in China that we can enter into a joint venture. Because the margins are relatively thin. The manufacturing margins on this low-end down lighting and HID business. I think we have to be the sole owner of this. The real key to it is finding the right people and the right opportunity and we haven't found it yet. We're still aggressively looking and still hope to do that. Now, we just can't find what we think is the right thing to do, we're not going to do something that doesn't make sense. We're still looking at it and still hope to do it at some point in the future.

Okay. Also, question again related to margins. The first quarter operating margins were obviously very strong. Historically they -- they are the lowest quarter of the year. Do you expect that trend -- I understand that there are certain circumstances in terms of the product mix and timing. But excluding all of that, just kind of seeing what's happening in the end markets. Do you still expect that same seasonality in terms of margins to occur throughout the year?

One thing I think -- it's a good question you raised that a lot of analysts try to take the incremental margin for the quarter and extrapolate that over the next whatever number of years. That's kind of a dangerous thing to do. Because again, some of the margin during the quarter is mix and some of it is related to temporary timing differences between price and costs. So it's not necessarily all related to additional burden and overhead absorption and just pumping more of the factories. So I would caution you to just take the incremental margin for the quarter and extrapolate that over future quarters.

Okay. And then, Bill, also do you have the tax rate for the quarter as well as your D&A?

Yes, I got that here. D&A for the quarter is 8.2 million. And the tax rate is 38% even.

Okay. Great. Thank you.

And we'll take our next question from Robert McCarthy from Banc of America Securities.

Good afternoon, everyone. First question, just maybe on the pricing environment. Obviously we've seen with the solid results that you've put up and that Acuity has put up that pricing at the margin appears to have firmed. Obviously given the fact that we still have rampant price increases across the board that that definitely creates another [Inaudible] between that and operating margins. But could you comment on the near to intermediate outlook for pricing and perhaps talk about with greater detail the difference between the larger project work and the stock and flow?

Well, first on the pricing. The pricing is dynamic. It depends a lot on what happens to our competition and what they do. I believe that several people in our industry have now gotten a little more serious about improving their margins. And I think the overall pricing levels are at a higher level today and I think they're holding better than they have at any time certainly in recent years. Now, depending on the market conditions, though and how strong business remains, it could change very quickly. If all of a sudden, people start not being able to fill their factories up and they have a lot of excess capacity and that, and people start getting aggressive with pricing and margins have a tendency to deteriorate some. We hope that won't happen. We hope everybody's learned lessons and won't do that in the future. We can't assure anybody of that. We've got to be somewhat competitive. We just don't chase the low-end commodity products.

On the other hand we've got to be competitive in the marketplace. We're like the rest of our competitors, we're going to do what we have to do to run our business and hopefully to keep growing it. I can't remember what the second part of your question was now.

I don't think I can either. Maybe we could talk, perhaps about specifically obviously one of your larger competitors and what they're doing there. Do you think there's some sense given the fact they've got a lot of pricing mix, particularly on the fluorescent side of the business where you could in fact be losing some share to Acuity?

I don't know and I just would rather not comment on what my competitors -- I don't really know. It's possible that we could lose some share in the low-end of the marketplace. We're not aggressive in trying to go out and sell into the high volume commodity type business. And so what people choose to do in that market, we really don't have even a lot of window of opportunities there because we just -- it's just not something we focus on. The fluorescent business we do is projects that we go out and get specified. And then we're going to be very competitive on that product, on the fluorescent end as well as the overall job. We'll compete with anybody in that arena. We won't compete day in and day out just on the volume commodity product lines.

Bill, perhaps you could comment about the outlook you're seeing. Recent months has been the outlook for retail construction. And what you're seeing there and perhaps you could talk about the inner play of there seems to be some significant retrofit activity going on there, as well.

I don't think it's changed that much, Rob. As I said in my earlier comments, I think that suburban retail remains a concern, particularly the grocery store business and retail that's related to the suburban residential buildout and construction.

What percentage of your overall portfolio do think is relatively exposed to end market?

It's hard to tell, it's--.

Would it be 20%?

Nowhere near that much.

Maybe, of the commercial, which again is about 25% of our overall business, it's maybe10% of that business.

Okay.

But the other retail. There's certain pockets of retail that are doing pretty good.

You talk about big box retail construction?

The higher-end retail stores.

The higher end retail stores.

Stores like--.

Nordstrom -- stores are doing extremely well and continuing to build and seem to be doing very well. Even some of the specialty food people that we do business with are doing -- they're still very active and seem to be doing very well right now.

Have you seen a lot of retrofit activity of existing stores for new fixtures?

In the retail business, which has been a significant part of our business for many, many years, particularly areas like New York City and places like Washington, D.C. and a lot of the big cities as you know, there's not a lot of cranes, not a lot of new building going on there. There but they've constantly have got to upfit, retrofit those little stores to keep them fresh and looking good and that. That's always an ongoing, and that's a nice chunk of business we have through existing national account agreements and people we work with.

The other thing I think is a real opportunity and I think we're going to get more and more momentum going on is this new Energy Bill that has been extended another year. We got some of our divisions are putting a lot of emphasis on this. Hopefully we'll even get the Federal Government serious about replacing all of these old F40 magnetic fluorescent fixtures that are in practically every federal courthouse in this country. We think there's a lot of opportunity over the next 2 to 5 years, really to retrofit a lot of the -- this old product that's still up there. We still think there's a base. We don't know the exact number. Somewhere between 700 million and 1 billion fixtures that are installed out there that need to be retrofitted with new modern energy efficient products.

You're talking about units obviously?

Yes, that's correct.

And then, perhaps you could talk about the differential the 15.9 you alluded to for excluding acquisitions, that 120 basis points, was that just what you previously alluded to some of the step up charges and integration costs? How should we think about that 120 basis points?

It's that and just that those divisions are operating at lower margins that our other businesses.

So it's overall baseline mix, as well?

Well, and if you went back and looked at these companies, I don't know if you paid much attention to the companies that we acquired, but we have never acquired these companies at the price we paid for them. If they would have been 15 to 16% margin companies, we just wouldn't have. Our opportunity there is to buy these companies. And we evaluate this before we acquire these companies, look at it and compare it to similar companies look at their operations versus our operations. What we do is say we think there's a tremendous opportunity here and a lot of upside and that's why we're able to acquire these companies at the price we do and then it takes us a little time and a little more money that we have to spend. In the long run, we expect to get all the companies up at least to our average or better.

Given the Pacificas increase in acquisition growth within your industrial and other unit. Is there any structural difference in the margins we should see out of that business going forward? It's kind of oscillated in kind of the low to mid teens. How should we think about that business going forward for modeling purposes?

I don't think it'll change much. It's pretty similar. This company Carsonite, is kind of a -- it's a nice little company. It's one of those acquisitions that we made that -- we bought it out of bankruptcy, so you know it had to be in pretty bad shape. And it's one of those companies that we were able to turn around very quickly just because we have a company that's very similar in the pulp attrusion process and located very closely to them. We didn't have to add a lot of overhead, a lot of costs, we were able to buy materials at lower prices. So we were able to just pick up that business and take it forward very quickly without much. There's still opportunities to improve that going forward, but we're able to do that one more quickly simply because it wasn't a long distance problem that's located in a close proximity to our Shakespeare operation, both of them being in South Carolina and that.

JJI is a little different story. They've got lots of little operations scattered all around the country. It's going to take more time. They've got an operation in Germany. Once we think the German operation can be a good operation. But we have to move out of an old, cruddy, multi-story facility and we'll do that the first quarter of next year. We have a lease through the end of this year and then we can move. We can't get into this new building until the beginning of the second quarter next year or late in the first quarter. But once we make that move, it's going to significantly improve the profitability and that of that division.

Okay. And then one final question on nonres. I know we've kind of beat a dead horse here. If you could talk about maybe some of the end market detail and geographic detail you're seeing. And then perhaps just any initial comments on sustainability or what you're kind of looking at in terms of near term milestones from the data that would suggest any kind of prolonged acceleration or activity, or conversely deceleration.

Well, I don't know that we'd talk about acceleration or deceleration in my opinion. I think we'd continue to focus and pretty much keep doing the same things we're doing. If you look at the markets, you take markets like Las Vegas as an example. The big casinos and if you know anything about Las Vegas right now, the residential market out there is really in the tank. It's terrible. But if you look at the strip and what's going on there, there's some -- the largest hotel that ever to be built out there is under construction or going to be under construction here very soon and just lots of activity in a market like that. Well, that's right in our sweet spot. And we love that type of business. And how long that's going to go on it appears for us certainly for the foreseeable future. Then there's other markets very similar.

We have a nice market position in places like Washington, D.C., in New York, and one of the things that I like about those markets, it doesn't seem that they have a lot to do with what's happening in the overall marketplace. There's always lots, the government seems to have money. There's always lots of retrofits, they're always changing from condos to apartments and back to retail. Those markets are pretty active. We're actively engaged in those types of markets. There's some areas right now that are a little soft. The West Coast for us, up and down the West Coast right now seems to be a little soft. California historically has always been pretty good over the long haul. But right now it's a little soft.

On the other hand, the architectural -- the architectural -- the architects, their regional analysis that they publish on the website indicated a lot of strength in terms of inquiries and billings. That may come back as we get into the late summer.

Have you -- have you, Bill, or anybody working with you done a rigorous analysis on looking at your monthly sales and the lag between your monthly sales and what the Architectural Billings Index has told you?

No.

Okay. All right.

Federal indicators.

I'm sorry?

It's just one of several indicators. Okay.

Well, thank you for your time, gentlemen. I'll leave it there.

We'll take our next question from Cheryl Cortez from SIC.

Hello. I was just wondering if you could add more color on any possible acquisitions or kind of businesses that you're looking at in the future?

Well, the only thing I would say is that we constantly have a portfolio. If we wanted to buy lots of residential companies today, we could buy lots of them. But we're not that interested in buying most of them. The market is very soft. There's certainly a lot of them for sale right now. Opportunistically we might acquire the right company of company if we found a niche company that we thought would be very attractive we would consider buying it. For the most part, we continue to look for bolt-on companies that either fit well within our divisions or would be a nice product line addition, a nice market addition. And we've got two or three companies just like we always -- we always have 2 or 3 or 4 that we're looking at most all the time. Some of them may come about, some of them may not, we don't know. We just recently sent in a couple of the letters of intent with a couple companies and whether that happens or not, we have no idea at this point.

Thanks a lot. It seems like all of the other questions I had were answered.

Okay.

[OPERATOR INSTRUCTIONS] We'll take our next question from [Tom Brink] from Davenport. Please go ahead.

Good afternoon, guys.

Good afternoon.

Just curious, now that you've had a chance to sort of see the market reaction to the price increases. I know you did those in February, but pretty much did them company wide, including your acquisitions as I understand it. And I'm wondering if the pricing power that was successful for your acquired companies was as strong as that for your existing legacy businesses.

In companies where you have a strong market position and you've got good products, the answer is yes. Where you've got companies that have kind of me-too products and they have to be real competitive, the answer is no. It really depends, but I would say there's no difference between the companies that we've acquired versus the companies we own. Some of the companies we have acquired are kind of lagging in coming out with new products, they might not be able to get as much price increase.

We find the real opportunity for price increases in this market in the long run really are to introduce innovative new products. And then for -- when you do that, you have a certain period of time where nobody else has those products out there. And if they really are innovative outstanding quality products, you're perfectly able to name your price. Sooner or later somebody will come along talk you off. In the meantime we work very hard to try to take cost out of those products, make them more efficient, all that kind of stuff. But I would say there's not much difference between acquisitions and ongoing companies as it relates to the price increase.

Okay. And as far as you talked about Strand being a slight loss in the first quarter, I was wondering about maybe the operating margins, just roughly of the other divisions, the other acquired companies. Looking at high single digits, mostly or?

Kind of mid single digits at this point. And again, you've got to realize that some of the companies have some costs baked in there that are some one-time costs. Like Hanover Lantern, for the first couple of months until you blow through the orders and that, the step up, we don't get any credit for that so their margins right now look pretty bad. But once they're through that, they will eventually -- they will very quickly jump up into double digit. And they'll all be double digit in a relatively short period of time, I think.

Okay. Do you have any specific plans to consolidate facilities other than obviously Hanover Lantern getting its foundry consolidated into Hadco?

The answer is yes. We are constantly looking at opportunities where we make light products and that to consolidate. It's just one of those things it's very difficult to talk about publicly because the information obviously we're giving to you today is public information. And we don't talk -- some of our employees don't know so we don't talk to that. But to answer your question, we are constantly looking. And there's no question that we will be looking to consolidate. We've got a major one in Germany that I just mentioned. We've got a couple of other major ones later this year, early into next year that will be happening. And I'm sure there's more. We just will constantly be looking at opportunities.

One thing to note, though with Genlyte, we've done a lot of these over the past 10 years or so. And we -- the one thing we really focus on is customer service. We've learned what not to do in terms of making sure we do it carefully and not to make -- to make it totally transparent to customers. And sometimes we miss a couple orders here and there that we don't get out on time, but we do our best to choreograph these things so that they are sciences of the customer needs.

Okay. Thanks, guys and congratulations on another great quarter.

Thank you.

Thank you. And this concludes the question and answer session. We will shortly hand over to Mr. Powers for closing remarks.

Just to thank all of you for participating in our conference call today. And appreciate all of your support. And have a great day.

And as a reminder, this conference has been recorded with an audio archive copy becoming available in approximately three hours on Genlyte Group's website at www.genlyte.com. Again, that's www.genlyte.com. Thank you. You may disconnect.